Italy’s Right Wing Government Adopts Progressive Oil Tax Policy

According to this report, Italy has instituted a windfall profits tax on its domestic oil companies with the proceeds to be given to the poorest consumers.  I’d prefer to see an across the board tax cut, given that everyone consumes oil products on a more or less equal basis.  Regardless of the details, though, I suspect that Italy is only the first of what will be many countries that will follow this path.

I know this tax model horrifies some of the more radical free market supporters but in these circumstances it is logical, fair, and good for the economy I believe.  It’s logical because the spread between the cost of oil recovery - even the marginal cost of recovery in deep ocean environments - and the price of oil is so huge that only part of it is needed to spur production. If the tax is not overly steep it will not have any detrimental impact on future oil production.  In the meantime, consumers are being strangled by high oil prices and need some relief if the general economy is to be healthy.

It is fair because the oil companies did not do anything useful or clever to achieve the huge increase in profits resulting from the worlds growing shortage of oil, so they should not be rewarded with the full amount of the gains.  Consumers may be blamed for profligate oil consumption in some locales, but most of them are innocent, particularly in the E.U. where cars are generally very fuel efficient by American standards.  So there is no reason that consumers should bear 100% of the brunt of the oil shortage problem.

Finally, it makes good economic sense because it mitigates the strangle-hold on the economy that very high oil prices are having while keeping 99% of the price mechanisms for supply and demand in place.  The re-distributed tax funds do not necessarily spur more oil consumption because the consumers who get them are free to spend them on anything.   The price of gasoline remains high, so consumers who are motivated to change behavior to reduce oil consumption still have the same motivation.  And oil profit margins remain very high also providing ample incentive for oil companies to produce more.   The price of oil remains high providing motivation for alternative transportation systems to be developed.

Of course the devil is in the details.  It would be possible to design an oil windfall tax system that would be discouraging to oil production, as the Russians have done (intentionally, I believe).   So not all oil windfall profits taxes would work well.  On the other hand, a moderate tax that is well calculated to retain nearly all the inducements to produce and consume that market prices provide is constructive for the economy and fair to all parties, in my opinion.

Posted in Categories: Commodities, Contributor, Eurozone, External Research.

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